Captive domiciles turned their eyes to the east for new formations, but the hoped-for influx is failing to materialise.
Up until the end of the 1990s, South-East Asia was booming. The tiger economies could do no wrong, so it seemed, but an unexpected financial crisis put paid to the idea that the only way was up. Two years after the slump, the Asian insurance markets appeared to have bounced back from their low points, and potential economic development was taking western eyes back in an easterly direction. Figures published in Swiss Re's sigma report Insurance markets in Asia: sanguine outlook despite short-term uncertainties, published earlier this year, state that excluding Japan, the Asian insurance non-life and life sectors are expected to grow by 7.9% and 8.9% per annum from 2001 and 2005. Japan's growth is anticipated at a much lower level, 1.9% and 2.3% respectively.
Captive growth potential
But where there's a growing insurance market, there is also the potential for captive growth, and hungry captive managers have been eyeing the region for some time now, hoping for new formations in their domiciles. In the main, though, this has failed to materialise.
One reason cited by several international captive management companies is the prevalence of cross-shareholding arrangements between industrial companies and insurance carriers, particularly in Japan. These strong relationships have stymied captive development.
Even so, recently Hawaii has been successful in attracting its first Japanese captives to its shores. Heiwa Insurance Inc, owned by electronic games manufacturer Heiwa Corp of Japan, was licensed to start business in Hawaii at the end of March. Hawaiian Governor Benjamin Cayetano welcomed the new operation, commenting, “This is the first foreign owner that is taking direct advantage of Hawaii's favourable regulatory and US investment environments to finance insurance risks abroad, while at the same time optimising its home country taxes.”
Heiwa Insurance's president, Kazuyoshi Horie, was equally as effusive. “We have been examining the use of a captive insurance company for several years and decided to set up a captive in Hawaii because of several advantages to our parent company in Japan,” he said. “Hawaii's prudent yet flexible regulatory environment, ease of access, related business interests and beneficial differential tax rates between the US and Japan are the more important issues that made a difference for us.”
Within the Asia region, the most successful captive domicile is Singapore. According to figures collated by RIRG, Singapore had 51 captive insurers at the end of 2000. Of these, 29 were from Australia or New Zealand, 20 from Japan, one from Canada and one from Singapore. Gross captive premium was around S$241m for the year, with 16 of the captives writing direct business and the balance writing reinsurance business. However, recent changes in the Singapore tax law may have a detrimental effect on captive numbers in the domicile, since it clashes with Japan's own ‘tax haven' tax law. Under this law, any jurisdiction with an effective tax rate less than 25% is deemed a tax haven, leaving the Japanese parent company open to an additional tax burden to bring its overall tax rate into line with the Japanese corporate rates.
Not only has Singapore lowered its corporation tax rate to 24.5%, but it also has exemptions which could bring the effective rate down even lower. As a result, some Japanese corporations have been considering redomiciling their captive operations. Marsh Broker Japan Inc v-p Mitsuhusa Ikeuchi said in an interview, “both Singapore and Dublin are turning out to be unattractive domiciles for Japanese captive insurance owners these days and captive insurance owners are now seeking whatever alternatives they can choose.” He said that since the change in the Singaporean tax laws earlier this year, several Japanese corporations had approached his organisation for advice on relocation, and already a second Japanese-owned captive has set up in Hawaii. Dublin captive management companies say they have not noticed any particular concerns from their Japanese captive clients. In total, 12 Japanese organisations had captive subsidiaries domiciled in Dublin at the beginning of this year.
Singapore has also been feeling the chill wind of Australian regulatory reform, which has been luring Australian-owned captives back onshore, though this trend may be reversing. In 1997, the Australian Prudential Regulatory Authority (APRA) amended its regulations to provide concessions for captives, recognising that their risk profile is significantly different from a general insurance company. The main changes to the regulations meant that Australian-owned captives were allowed to cede up to 90% of direct premiums to reinsurers, compared to the maximum 60% for general insurers. In addition, all their reinsurance may be placed offshore.
But there is some feeling in the Australian insurance sector that proposed APRA reforms intend ultimately to change the treatment of captives to closer reflect those of the general insurance market. With hardening market conditions pointing Australian corporations down the captive formation route, it looks likely that new vehicles may be established in more stable regulatory environments – such as Singapore – rather than onshore while the uncertainty over the treatment of captives remains.